Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 29, 2003
Commission File No.: 1-14130

MSC INDUSTRIAL DIRECT CO., INC.
(Exact name of registrant as specified in its charter)

(516) 812-2000
(Registrant's telephone number, including area code)

Website: www.mscdirect.com

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ý    No o

        As of January 6, 2004 34,804,554 shares of Class A Common Stock and 31,937,294 shares of Class B Common Stock of the registrant were outstanding.

SAFE HARBOR STATEMENT

        This Quarterly Report on Form 10-Q (the "Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward-looking statements may be found in Items 2 and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words "believes," "anticipates," "expects," "estimates," "plans," "intends," and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results, as discussed below under the heading "Risk Factors". Factors that may cause these differences include, but are not limited to:

•

changing customer and product mixes, market conditions and industry consolidation,



•

competition,



•

general economic conditions in the markets in which the Company operates,



•

risk of cancellation or rescheduling of orders,



•

work stoppages at transportation centers or shipping ports,



•

the risk of war, terrorism and similar hostilities,



•

dependence on our information systems,



•

dependence on key personnel,



•

availability of suitable acquisition opportunities, and



•

the other matters discussed in the Business Description contained in the Company's Annual Report on Form 10-K for the fiscal year ended August 30, 2003.

        Consequently, such forward-looking statements should be regarded solely as the Company's current plans, estimates and beliefs. The Company does not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

Available Information

        We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the "SEC"). The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

Internet Address

        The Company's Internet address is www.mscdirect.com. We make available on or through our investor relations page on our web site, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and beneficial ownership reports on Forms 3, 4, and 5 and amendments to those reports as soon as reasonably practicable after this material is electronically filed or furnished to the Securities and Exchange Commission.

MSC INDUSTRIAL DIRECT CO., INC.

INDEX

PART I.    FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements (Unaudited)

MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
(In thousands, except share data)

See accompanying notes.

1

MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income

(In thousands, except per share data)
(Unaudited)

See accompanying notes.

2

MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statement of Shareholders' Equity
Thirteen weeks ended November 29, 2003
(In thousands)
(Unaudited)

See accompanying notes.

3

MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

See accompanying notes.

4

Notes to Consolidated Financial Statements

(In thousands, except per share data)
(Unaudited)

Note 1. Basis of Presentation

        MSC Industrial Direct Co., Inc. ("MSC") was incorporated in the State of New York on October 24, 1995. The accompanying consolidated financial statements include MSC and all of its subsidiaries, including its principal operating subsidiary, Sid Tool Co., Inc. and is hereinafter referred to collectively as the "Company." All intercompany balances and transactions have been eliminated in consolidation.

        The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. Operating results for the first three months of fiscal 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending August 28, 2004. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended August 30, 2003.

        The Company's fiscal year ends on a Saturday close to August 31 of each year.

        A reconciliation between the numerator and denominator of the basic and diluted EPS calculation is as follows:

Note 2. Fair Value Disclosure Of Stock Options

        The Company accounts for its stock option plans utilizing the intrinsic value method, under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No compensation expense is reflected in net income, as all options granted under the stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Interim pro-forma information regarding net income and net income per common share is required by Statement of Financial

5

Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure", if the Company accounts for its stock options granted under the intrinsic value method.

        The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions, under which compensation expense would be recognized as incurred, of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.

Note 3. Available-For-Sale Securities

        During the first quarter of fiscal 2004 the Company's invested approximately $71,200 in municipal notes and bonds and corporate bonds. Investments with original or remaining maturities of less than one year are considered to be short-term. The custodian of these investments is a high quality financial institution. The Company's investments are classified as available-for-sale and are recorded on the consolidated balance sheet at fair value. Unrealized gains and losses on investments are included as a separate component of accumulated other comprehensive income (loss), net of any related tax effect. The Company will recognize an impairment charge if a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. At November 29, 2003 the fair value of these investments approximated their cost basis.

Note 4. Comprehensive Income

        The Company complies with the provisions of SFAS No. 130 "Reporting Comprehensive Income," which establishes standards for the reporting of comprehensive income and its components. For the thirteen weeks ended November 29, 2003 and November 30, 2002, the Company's operations did not give rise to items includable in comprehensive income which were not already included in net income. Accordingly, the Company's comprehensive income is the same as its net income for all periods presented.

Note 5. Shareholders' Equity

        Each holder of the Company's Class A common stock is entitled to one vote for each share held of record on the applicable record date on all matters presented to a vote of shareholders, including

6

the election of directors. The holders of Class B common stock are entitled to ten votes per share on the applicable record date and are entitled to vote, together with the holders of the Class A common stock, on all matters which are subject to shareholder approval. Holders of Class A common stock and Class B common stock have no cumulative voting rights or preemptive rights to purchase or subscribe for any stock or other securities and except as described below there are no conversion rights or redemption or sinking fund provisions with respect to such stock.

        The Company reissued approximately 15 shares of treasury stock during the first three months of fiscal 2004 to fund the associate stock purchase plan. The Company did not repurchase any shares of its Common Stock during the first three months of fiscal 2004 but may make future repurchases.

        The holders of the Company's Class B common stock have the right to convert their shares of Class B common stock into shares of Class A common stock at their election and on a one-to-one basis, and all shares of Class B common stock convert into shares of Class A common stock on a one to-one basis upon the sale or transfer of such shares of Class B common stock to any person who is not a member of the Jacobson or Gershwind families.

        The Company has 5,000 shares of preferred stock authorized. The Company's Board of Directors has the authority to issue shares of preferred stock. Shares of preferred stock have priority over the Company's Class A Common Stock and Class B Common stock with respect to dividend or liquidation rights, or both. As of November 29, 2003, there were no shares of preferred stock issued or outstanding.

Note 6. Product Warranties

        The Company offers a one-year warranty for certain of its machinery products. The specific terms and conditions of those warranties vary depending upon the product sold. Generally, the Company provides a basic limited warranty, including parts and labor, for these products for one-year. The Company would be able to recoup certain of these costs through product warranties it holds with its original equipment manufacturers, which typically range from thirty to ninety days. In addition, the Company's general merchandise products are covered by third party original equipment manufacturers' warranties. The Company's warranty expense for the thirteen week periods ended November 29, 2003 and November 30, 2002 has been minimal.

Note 7. Recently Issued Accounting Pronouncements

        In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities", which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", relating to consolidation of certain entities. First, FIN 46 requires identification of the Company's participation in variable interests entities ("VIE"), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a standalone basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for entities identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIE that are deemed significant, even if

7

consolidation is not required. The standard was effective during the current quarter. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

Note 8. Legal Proceedings

        On August 8, 2002, the Company, its directors and certain of its officers were sued in the United States District Court for the Eastern District of New York in an action entitled Thomas Nunziata vs. MSC Industrial Direct Co., Inc. et. al (CV No. 02 4422). Plaintiff, on behalf of a class of the Company's stockholders, sought unspecified damages based on his allegations arising from the Company's announcement that it would restate its consolidated financial statements for fiscal years 1999 through 2001 and the first three quarters of fiscal 2002. Plaintiff alleged that during the periods affected by the restatement, the Company, its directors and certain of its officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by materially misleading the investing public by making false statements in order to inflate the price of the Company's common stock. On August 14, 2002, the Company and certain of its officers and directors were sued in the United States District Court for the Eastern District of New York in an action entitled Sandra Joan Malin Revocable Trust vs. MSC Industrial Direct Co., Inc. et al. (CV No. 02 4503). The allegations in this matter were substantially similar to those made in the Nunziata action. On September 11, 2002, these actions were consolidated under the caption In re MSC Industrial Direct Co., Inc. Securities Litigation (CV No. 02 4422). A lead plaintiff, International Association of Machinists National Pension Fund, was named on November 6, 2002, and such lead plaintiff filed a consolidated amended class action complaint on December 23, 2002. The Court granted the Company's motion to dismiss the amended complaint on September 13, 2003. The plaintiffs were granted leave to re-plead their complaint and had until October 28, 2003 to file a second amended complaint. On October 28, 2003, the parties entered into a Memorandum of Understanding to settle the matter for $1,250. It is anticipated that substantially all of the settlement will be covered by insurance. On November 27, 2003, the parties filed a Stipulation and Agreement of Settlement. On December 3, 2003, the court preliminarily approved the settlement, certified the action as a class action, and scheduled a fairness hearing for March 16, 2004, to consider whether the settlement should be finally approved.

        There are no other material legal proceedings pending against MSC.

Note 9. Subsequent Events

        On December 31, 2003, a registration statement on Form S-3 filed by the Company on behalf of certain selling shareholders was declared effective by the Securities and Exchange Commission. The registration statement covers the offer and sale of up to 6,900 shares of Class A Common Stock by the selling shareholders, including sales by the Company's Chairman and Chief Executive Officer and other family members and/or entities. On January 8, 2004, the Company announced that it would be filing a preliminary prospectus supplement covering the proposed underwritten offering by the selling shareholders of up to 6,000 shares (plus up to an additional 900 shares to cover over-allotments, if any).

        On January 6, 2004 the Board of Directors approved an increase in the quarterly dividend rate to $.08 per share. The $0.08 quarterly dividend is payable on January 30, 2004 to shareholders of record at the close of business on January 20, 2004. The dividend will result in an anticipated quarterly payout of approximately $5,300 based on the number of shares currently outstanding.

8

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following is intended to update the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended August 30, 2003 and presumes that readers have access to, and will have read, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in such Form 10-K.

        This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. Such forward-looking statements involve known and unknown risks and uncertainties and include, but are not limited to, statements regarding future events and our plans, goals and objectives. Such statements are generally accompanied by words such as "believe," "anticipate," "think," "intend," "estimate," "expect," or similar terms. Our actual results may differ materially from such statements. Factors that could cause or contribute to such differences include, without limitation, changing customer and product mixes, market conditions and industry consolidation, competition, general economic conditions in the markets in which the Company operates, risk of cancellation or rescheduling of orders, work stoppages at transportation centers or shipping ports, the risk of war, terrorism and similar hostilities, dependence on our information systems, dependence on key personnel and the availability of suitable acquisition opportunities. See "Risk Factors" at page 16. Although the Company believes that the assumptions underlying its forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, the Company cannot make any assurances that the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved. Furthermore, past performance is not necessarily an indicator of future performance. The Company does not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

Overview

        MSC Industrial Direct Co., Inc. ("MSC") was formed in October 1995 and has conducted business since 1941. MSC and its subsidiaries, including Sid Tool Co., Inc. (the "Operating Subsidiary"), are hereinafter referred to collectively as the "Company."

        MSC is one of the largest direct marketers of a broad range of industrial products to small and mid-sized industrial customers throughout the United States. We distribute a full line of industrial products intended to satisfy our customers' maintenance, repair and operations ("MRO") supplies requirements. We offer in excess of 500,000 stock-keeping units ("SKUs") through our master catalogs, weekly, monthly and quarterly specialty and promotional catalogs and brochures and service our customers from four distribution centers and approximately 90 branch offices. Most of our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received.

Results of Operations—
Thirteen weeks ended November 29, 2003 and November 30, 2002

        Net sales increased by $12.1 million, or 5.7%, to $222.8 million in the first quarter of fiscal 2004 from $210.7 million in the first quarter of fiscal 2003. This increase was primarily the result of an increase in sales to existing customers and an increase in the number of active customers. The number of active customers increased by 11,000 to approximately 345,000 from approximately 334,000 in the first quarter of fiscal 2003.

9

        Gross profit increased by $5.8 million, or 6.1%, to $100.3 million in the first quarter of fiscal 2004 from $94.5 million in the third quarter of fiscal 2003. The increase in gross profit dollars was primarily the result of an increase in net sales as explained above. As a percentage of net sales, gross profit remained relatively unchanged at 45.0% for the first quarter of fiscal 2004 as compared with the first quarter of fiscal 2003.

        Operating expenses decreased by $.7 million, or 1.0%, to $73.4 million in the first quarter of fiscal 2004 from $74.1 million in the first quarter of fiscal 2003. The decrease in operating expenses in dollars was primarily the result of a decrease in depreciation expense and a decrease in advertising expense due to planned reduction in mailings, mainly offset by an increase in freight expense due to an increase in net sales as compared to the first quarter of fiscal 2003. As a percentage of net sales, operating expenses decreased from 35.2% to 32.9%, primarily as a result of the distribution of fixed expenses over a larger revenue base as well as the dollar decrease in operating expenses. Operating expenses in dollars may increase in the second quarter of fiscal 2004 due to hiring additional sales personnel and expected sales volume increases.

        Income from operations increased by $6.5 million, or 32.0%, to $26.9 million in the first quarter of fiscal 2004 from $20.4 million in the first quarter of fiscal 2003. The increase in dollars was primarily attributable to the increase in net sales and decrease in operating expenses described above. As a percentage of net sales, income from operations increased from 9.7% to 12.1%, primarily the result of the distribution of fixed expenses over a larger revenue base as well as the dollar decrease in operating expenses as described above.

        Interest income, net. Net interest income was $0.3 million for the first quarter of fiscal 2004 compared to $0.2 million for the first quarter of fiscal 2003. The Company had more cash and investments in the first quarter of fiscal 2004, which was offset by lower interest rates.

        Provision for income taxes. The effective tax rate was approximately 39.5% for the first quarter of fiscal 2004 and fiscal 2003, respectively.

        Net income increased by $4.0 million, or 32.0%, to $16.5 million in the first quarter of fiscal 2004 from $12.5 million in the first quarter of fiscal 2003. This increase was primarily the result of the increase in income from operations as described above offset by higher provisions for income taxes.

Liquidity and Capital Resources

        Our primary capital needs have been to fund the working capital requirements necessitated by our sales growth, adding new products, and facilities expansions. Our primary source of financing has been cash generated from operations. Working capital decreased from $353.9 million at August 30, 2003 to $314.5 million at November 29, 2003. This reduction is primarily the result of the classification of investments of $68.2 million in available-for-sale securities as non-current assets because their original maturities are greater than one year. A significant portion of these available-for-sale securities bear interest at rates that are reset at their applicable interest rates at regular intervals. Taken as a whole, cash, cash equivalents and all available-for-sale securities increased by approximately $19.5 million from $114.3 million at the fiscal year ended August 30, 2003 to $133.8 million at the first quarter ended November 29, 2003. We anticipate cash flows from operations, available cash reserves and available lines of credit will be adequate to support our operations for the next 12 months.

        Under the terms of the credit facility, the maximum permitted borrowings are $110.0 million under an unsecured revolving credit agreement. Interest on amounts borrowed may be paid at a rate per annum equal to the bank's base rate (4.0% at November 29, 2003) or, alternatively, at the bankers' acceptance rate or LIBOR rate plus margins, which vary from the per annum rate based on the ratio of total liabilities to effective net worth, or bid note rate. This credit facility contains certain covenants limiting mergers, use of proceeds, indebtedness, liens, investments, sales of assets, acquisitions, and

10

payment of dividends. This credit facility also contains certain standard financial covenants. As of November 29, 2003 the Company had no outstanding borrowings under this agreement and was in compliance with all financial covenants.

        Net cash provided by operating activities for the thirteen-week periods ended November 29, 2003 and November 30, 2002 was $13.9 million and $10.1 million, respectively. The increase of approximately $3.8 million in net cash provided by operations resulted primarily from an increase in net income.

        Net cash used in investing activities for the thirteen-week periods ended November 29, 2003 and November 30, 2002 was $73.4 million and $2.3 million, respectively. The increase in the usage of cash is a result of the Company's decision to in invest approximately $71.2 million in available-for-sale securities during the first three months of fiscal 2004.

        Net cash provided by financing activities for the thirteen-week period ended November 29, 2003 was $7.8 million and net cash used in financing activities for the thirteen weeks ended November 30, 2002 was $2.6 million. The net cash provided by financing activities for the first thirteen weeks of fiscal 2004 was primarily attributable to the proceeds received from the exercise of Class A common stock options principally offset by the payment of the quarterly cash dividend on Class A common stock outstanding. The net cash used in financing activities for the first thirteen weeks of fiscal 2003 was primarily attributable to the purchase of Class A common stock for the treasury.

<